Pak rupee – not out of the woods yet

By Faraz Ahmed
Published in The Express Tribune on September 20, 2021

KARACHI: There has been a recent slide in Pakistani rupee against the basket of main currencies, mainly the US dollar, where the rout intensified lately, hitting a multi-year low of Rs169 in the forex market before the State Bank intervened in an effort to curb the excitement of speculators.

Although there is no official account of what happened exactly behind the scenes, the odds are stacking against the balance of payments in general and long-term stability of the rupee in particular.

Despite the fact that the gross foreign currency reserves of Pakistan are at an all-time high of $20 billion after it recently received Special Drawing Rights (SDRs) of $2.75 billion from the International Monetary Fund (IMF), the speculators saw an opportunity in the forex market due to the rising current account deficit and lacklustre performance in other investment avenues.

Lately, when the KSE 100-share Index had just been moving in a narrow band of 1,000 points for many weeks, the speculators took refuge in piles of US dollar to generate returns as the gold also lost its shine due to the rising value of the greenback.

The strategy of holding the US dollar has beaten both stocks and gold by a huge margin. Other local factor is the political uncertainty in Kabul, which increases the demand for dollar by Afghan nationals through Pakistan’s market.

The trade deficit is rearing its head lately as economic activity is picking up and post-pandemic pent-up demand is on the rise.

It is certainly not raining but pouring for the PTI government as energy prices are steadily rising globally, putting pressure on inflation and current accounts and will eventually force the State Bank to use the next tool in its toolbox, which is interest rate.

Besides the local and regional dynamics, the dollar has already hit a near 21-day high against a basket of major currencies after the unexpected US retail sales numbers, which came last week in sharp contrast to the fear of a slowdown in the US economic growth.

The August US retail sales data brings some clarity to both the tapering and interest rate direction by the US Federal Reserve. Tapering typically lifts the dollar as it suggests the Fed is one step closer to a tighter monetary policy.

As the Federal Reserve will start tapering its asset purchase programme, the US dollar will tend to rise in future against major currencies including the Pakistani rupee.

The only silver lining so far is the support from non-resident Pakistanis, who have sent record remittances in the past year since the outbreak of the Covid-19 pandemic, reaching $29.4 billion in 2020-21.

Also, the recent initiative by the State Bank, ie the Roshan Digital Account (RDA), provided the government with another source to build foreign exchange reserves, by crossing the $2 billion mark.

The recent falling rupee could trigger further inflows from the Pakistani diaspora but these funds should be diverted to some constructive avenues, not just for flipping plot files or parking in government interest-bearing debt instruments such as the Naya Pakistan Certificates.

Now that we have seen the two extreme models, ie artificially high rupee during the PML-N era or jacking up the interest rate to insanely high levels of 13.25% during the initial period of PTI administration, one can hope that sanity will prevail in the upcoming monetary and fiscal policy decisions when the going will get tougher.

As the PTI government is preparing for its last innings in the run-up to the 2023 election, it has to tread cautiously when it comes to taming the beast of inflation and the rising current account deficit.

With winter approaching and fuel prices soaring in Europe due to the fall in electricity output from sustainable sources, such as wind and solar, the energy prices can easily spiral out of control and the recent hike in petrol price to an all-time high of Rs123.79 a litre is already fuelling anger among the masses, who are living on the edge due to the rising food prices.

The writer is a financial market enthusiast and is attached to Pakistan’s stocks, commodities and emerging technology

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